Stock-Based Pay, Liquidity, and the Role of Market Making

36 Pages Posted: 25 Sep 2019

See all articles by Riccardo Calcagno

Riccardo Calcagno

EMLYON Business School

Florian Heider

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Date Written: September 24, 2019


We study the role of trading, and in particular market making, for the provision of stock-based incentives to managers. Market making provides liquidity as it allows trading on private information about the value of the firm. But in a liquid market the stock price does not react much to the order flow, including the order flow of informed traders. Market making therefore makes it more difficult to detect shirking and to provide stock-based incentives. Our model provides novel comparative statics, e.g., the manager may receive more stock-based pay when traders' information becomes worse, clarifies the role of public information such as accounting numbers as an additional performance measure, and shows that economic efficiency can be independent of stock-market efficiency because the optimal incentive contract adjusts to market conditions.

Keywords: Market-Based Pay, Information Aggregation, Market Making, Liquidity, Stock-Price Informativeness, Pay-for-Performance Sensitivity

JEL Classification: G14, G34, D86

Suggested Citation

Calcagno, Riccardo and Heider, Florian, Stock-Based Pay, Liquidity, and the Role of Market Making (September 24, 2019). Available at SSRN: or

Riccardo Calcagno

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
+33(0)4 78337739 (Phone)


Florian Heider (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

HOME PAGE: http://

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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